The growth of population and the lack of home affordability are some of the main factors that have led to the record low vacancies rates and the climbing rental demand in the U.S.A during the last decade. This has made the real estate rental market a very attractive industry to enter for both local and foreign entrepreneurs. Multi- unit residential buildings, single family residences, office centers are some of the real estate assets that foreign owners tend to buy and keep in the USA. Such investments can ensure long- term income and future wealth growth, yet the lack of financial solutions from local institutional lenders and the high U.S. income tax rates applicable for foreign entrepreneurs are considered to be the biggest challenges for the majority of the international players.
Rental Property Ownership and Income Tax Liabilities
Generally, anyone can buy a property in the U.S.A. as there are no nationality restrictions who can own a real estate asset in the country. Investing/doing business in the U.S is made especially easy for the citizens of 39 countries (UK, Australia, Netherlands, Germany, etc.), which are part of the Visa Waiver Program that encourages business and leisure travels to the U.S.A. by eliminating administrative visa expenses/time associated with it. For entrepreneurs from other countries business visas are issued by their local U.S. embassy.
To start with, you will have to decide what type of ownership the property title will be held under. Only a very few foreign entrepreneurs choose the individual direct ownership, mainly due to the high income taxes and liabilities affiliated with it. Limited liability Company (LLC) is considered to be the most favorable type of ownership for international entrepreneurs as it provides the best income tax treatment and protects one’s personal wealth. Income tax considerations shall be taken into account when balancing your real estate investment project as you will need to pay U.S. income taxes on rent payments received. A federal income tax return must be filed on your behalf therefore; you will need to apply for an ITIN (International Taxpayer Identification Number) by using form W-7.
Financial Solutions
Obtaining a mortgage through an American bank institution can be challenging for foreign entrepreneurs, mainly due to the lack of credit score and financial history of the Borrower. However, there are private lenders that are pleased to collaborate with international Borrowers as the loan is secured by the value of the real estate property. As long as there is sufficient financial commitment in the deal from the Borrower (private lenders will usually require 35% down payment for property purchases and the loan- to- value (LTV) would not go over 65% ), the loan application will most likely will be approved. Private lending interest rate for financial solutions is generally higher and it can vary between 6 % – 10 % depending on the term of the loan.
Foreign entrepreneur should carefully plan their new market ventures and strive to match with a reliable overseas partner that can assist with end-to-end solution for their U.S. business needs. Universal Commercial Capital offers the best international financial solution for the purchase/refinance of a rental real estate property and can further help foreign entrepreneurs with finding a licensed local property management team, income tax accountant, and general attorney office.
